Preston Council last year knocked back plans for two sites in Broughton but has been overruled amid concerns about inadequate housing supply.
Independent inspector Keith Manning, in a decision report, said Preston’s current five-year supply is “at best only 70 per cent of what is required by national policy”, representing a "very substantial shortfall."
The report reads: "In broad terms I am satisfied that the supply, properly calculated in the context of relevant applicable policy, lies between three and three-and-a-half years only.
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"To put it another way, the current supply of deliverable housing sites is at best only 70 per cent of what is required by national policy as articulated in the framework and is very likely nearer 60 per cent.
"On any assessment, in the context of applicable local and national policy, that represents a very substantial shortfall."
The council ended its participation in the appeal hearing earlier this year because it could not show a full five-year supply.
Industry experts had told the Lancashire Post if the appeal decision went against the council it could see the local authority “lose a degree of control” in determining future applications while it is deemed to have an inadequate supply.
A spokesperson for Broughton Parish Council, who submitted evidence during the hearing, said they were “disappointed” with the decision and that the inadequate supply was the result of housing sites already given the green light not being built fast enough.
They added: “This (decision) over-rides everything else; Core Strategy, the Local Plan. But we will not give up on our own Neighbourhood Plan. The inspector acknowledged in his report a lot of what we had said.”
The council has said it has “concerns” over housing supply policy and highlighted that reforms are expected later this year.
Chris Hayward, Director of Planning at Preston City Council, said: “We are disappointed but not surprised our decision to reject two proposals for housing developments in Broughton has been overturned by an independent planning inspector.
"Upon advice from our Barrister in February, we took the decision to end our participation in the public inquiry after conceding that we cannot currently demonstrate a five year supply of deliverable housing land, as required by Government policy. This course of action was recognised by the inspector as responsible and reasonable behaviour in the conduct of appeal proceedings.
"We continue to have concerns about the Government’s policy on housing land supply and the uncertainty this creates, even when there is a recently-adopted local plan in place. We feel that this undermines confidence in the planning system, a view which Preston City Council has already expressed to the Minister for Planning.
"The basis on which the five year supply of housing land is calculated will be considered as part of the local plan review.”